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Shareholders, Directors and Bonuses

As the informal lawyer to my group of fellow commuters on the 0634 from Havant to Waterloo, I was asked yesterday to explain why directors of the Royal Bank of Scotland plc (RBS) might consider it necessary to resign if they were not permitted to pay what appears to the general public to be obscene levels of bonuses. The answer lies in the codified version of the old common law that directors owe a duty to act in the best interests of their company.

Under s.172 of the Companies Act 2006 directors have a duty to promote the success of the company, with six factors to consider set out at s.172(1). One of these factors includes acting fairly as between shareholders (s.172(1)(f)). Where one shareholder demands a particular course of action that in the opinion of the directors is not best suited to promote the success of the company or disadvantages another class of shareholders, they can claim to be put in a difficult position. The demand by HM Treasury for control over the RBS 2009 bonus pool as a condition of RBS entry into the Governments Asset Protection Scheme is arguably such a course of action, if you consider that the lack of bonuses will lead to the inability of RBS to retain and motivate high performers amongst its staff, so damaging its success and the share value for those minority shareholders not demanding direct control over bonuses.

However, the directors would have no difficulty if they were compelled by a shareholders’ resolution to act in a particular way. In particular, if the Articles of the company dictated a bonus policy on the company, the directors would be bound to follow the policy or risk derivative action by the shareholders. In the case of RBS, HM Treasury initially held 70.3% of its shares through UK Financial Investments Limited. It now holds an 84% economic interest in RBS following RBS’ entry into the Asset Protection Scheme, but the Government has no more than 75% of the shareholders’ votes (otherwise RBS would be required to delist).

It therefore remains open for the Government to call an extraordinary general meeting of RBS shareholders (as it owns more than 10% of the shares, it can demand that the directors call an EGM under s.303 of the Companies Act 2006), and table a special resolution to amend the Articles accordingly (s.21(1); this will need 75% vote (s.283)). The EGM would be the required route as only private companies can resort to written resolutions under the Companies Act 2006 (s.281(2)).